NeoGenomics, Inc. (NEO) Q4 2011 Earnings Report, Transcript and Summary

Greetings and welcome to the NeoGenomics Fourth Quarter 2011 Financial Results Conference. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug VanOort, CEO of NeoGenomics. Thank you. Mr. VanOort, you may begin.

Thank you, and good morning. I'd like to welcome everyone to NeoGenomics' fourth quarter 2011 conference call and introduce you to the NeoGenomics team that's here with me today. Joining me this morning are Steven Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Bob Gasparini, our Chief Scientific Officer; Fred Weidig, our Director of Finance and Principal Accounting Officer; Jerry Dvonch, our Director of External Reporting; and joining us by phone is Doctor Maher Albitar, our Chief Medical Officer, who is joining us from our Irvine, California office. Before we begin our prepared remarks, Steve is going to read the standard language about forward-looking statements.

Thanks, Doug. This conference call may contain forward-looking statements which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statements speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Okay. Thank you, Steve. I'll begin our call today with some brief remarks about our results for the fourth quarter and full year 2011. Then I'll comment both on what worked well for us and what challenged us in 2011. And to conclude my remarks, I'll share some of our key initiatives for 2012 and our performance expectations for the year ahead. We'll then turn the meeting back over to Steve to discuss our financial results in detail. We had a very good fourth quarter driven by excellent volume growth, good cost control and a relentless focus on quality and service. Once again, we reported the strongest quarterly year-over-year revenue increase in our corporate history. Revenue for the fourth quarter was $12.9 million, an increase of $4.1 million, or 47% compared with last year's fourth quarter. Revenue was $400,000 higher even than the top end of our upwardly revised guidance issued in early December. Our business has gained momentum during each of the past 3 quarters. On a sequential basis, fourth quarter revenue was up 14% from the strong results we posted in the third quarter. We're proud of our sales and marketing teams for delivering this strong growth. In fact, we're proud of all of our people for their commitment and focus on quality and service that allows us to sustain this momentum. Our laboratory's kept pace with the strong growth in volume and delivered excellent quality and service. As you know, a key measure of quality is turnaround time and our turnaround time performance continued to be excellent and remains a competitive advantage for us. We feel our strong levels of quality and service are helping us to retain clients at a better rate than ever before. We also were successful turning revenue growth into bottom line profit even as we invested heavily in growth initiatives. We earned $152,000 of net income in the quarter compared with a net loss of $377,000 in the fourth quarter of last year. Adjusting for a one-time government research grant recorded in the fourth quarter of 2010, we turned 22% of the incremental $4.1 million in revenue growth into net earnings. Almost exactly one year ago today, I commented on our full-year results by saying that 2010 was a year in which we made progress building and developing our infrastructure and we considered 2011 as a time for us to perform. We feel like we did perform in 2011. Our organization is stronger and deeper and we are executing better as a team. Furthermore, we have developed a culture based on core values, which we believe will make our performance more sustainable. For the full year, revenue was $43.5 million, an increase of $9.1 million or 27% compared with 2010. Our net income increased by $2.1 million and excluding last year's $374,000 research grant, over 27% of the incremental revenue fell to the bottom line. Looking at our financial performance for each quarter of 2011, you will notice that literally every number or metric improved each and every quarter of the year. Steve will review the results with you in detail, so I'd like to share with you some thoughts regarding what went well and what challenged us in 2011. Let's begin by reviewing 4 key challenges we faced last year and what we did to confront them. The first might be categorized as a good problem to have, but as the year progressed, we were increasingly challenged to keep up with the strong volume growth. The year-over-year growth rate in test volume accelerated from a low of 10% in the first quarter to over 57% in the fourth quarter. Simply put, we struggled to find enough qualified laboratory employees to allow us to continue to meet our turnaround time goals for the kind of high-complexity genetic testing we promised to our clients. Through hard work, we dealt with this by recruiting and training large numbers of people even as we developed and increased the satisfaction of our existing employees. We also capitalized on the closure of a competitor's lab in Tampa and managed to hire nearly 20 very experienced technologists. During the year, we hired about 50 people and most of that hiring occurred in the second half of the year. We met the challenge and many of our clients continue to tell us that we have among the best turnaround times in the industry and we now feel we're better positioned to deal with future volume increases more easily. The second key challenge was our laboratory information system. In 2010, we were dependent on an outside vendor to make any changes to our LIS. Our IT systems development was falling behind our need for change. So during the year, we managed to acquire the source code for our LIS and hire and develop our own capability to make enhancements to our system. We are now meeting this challenge. During the past few months, we have developed and launched over 50 much-needed enhancements to our LIS. In addition, we're beginning to make significant progress toward building high-value customized interfaces to connect with our customers. These new capabilities will allow us to be more efficient and effective as a company. A third key challenge was organizational in nature and involved a complete restructuring of our medical team and the leadership of our sales team. Both of these important teams have now been successfully restructured. Our current medical staff is fantastic and we couldn't be more pleased with the caliber of the team. Our new Chief Medical Officer and Director of R&D is Dr. Maher Albitar, a very well-known and respected leader in hematopathology and molecular oncology. Our new medical director for Fort Myers, who was also our Director of Surgical Pathology, is Dr. Barbara Chaitin, an outstanding and experienced medical leader for solid tumor pathology. Our new Medical Director for Irvine is Dr. Sally Agersborg, an M.D, Ph.D with great experience in training who has already added significantly to our company. And our new Director of Cytogenetics is Dr. Steve Brodie, a Ph.D who has provided strong leadership for our cytogenetics and molecular programs. Each of these leaders have known and worked with each other in the past and they make a great team. We're also very pleased with our sales and marketing leadership. On the sales team, we promoted our best regional manager to be our Vice President of Sales and Marketing and we replaced each of our 3 regional managers through either internal promotion or hiring people we've worked with previously. The new team has been very effective and our growth momentum is excellent. At this point, we're very pleased with both our new medical and sales leadership teams. Finally, we were challenged by reimbursement pressure, causing our average price per test to decline by 5% from last year and reducing our gross margins to an unacceptable 43.9% in the first quarter of the year. This is a difficult challenge to overcome and we are working on gross margin improvement. The productivity of our lab personnel increased by 11% on a full year basis, and these gains accelerated during the year with productivity increases of 18% in the fourth quarter compared with the previous year. As we move into 2012, we expect to have a stable reimbursement environment. This should allow us to translate further process and productivity improvements into higher gross margins as the year progresses. On the other hand, we had many good successes in 2011. We developed and launched significant total quality management initiatives as we continue the journey to total quality. We've made significant improvements in all key areas of customer and employee satisfaction as measured by our rigorous employee satisfaction surveys. We successfully developed and launched more new products and new technologies than ever before, including several new molecular and FISH tests, over 50 new immunohistochemistry antibodies, a new digital pathology platform and validated new 10 color flow, cytometry equipment. We found new ways to leverage the power of our flexible business model to develop new, deeper and more significant partnerships with our clients. Our clients increasingly rely on us as a one-stop shop and a long-term partner as we help them grow their own businesses. Our strong revenue momentum is another success as we have deployed focused and deliberate processes and are now attracting and retaining clients in record numbers and have a healthy sales pipeline. And we know you will agree that achieving profitability in the fourth quarter qualifies as a success. We generated over $1.2 million of positive cash flow from operations and positive net income in the fourth quarter even with significant investment in virtually all areas of our business. Moving now to the current year, I'd like to briefly share with you some of our key objectives for 2012. We intend to further drive growth through specially designed partnership programs, improved tools and processes to increase sales productivity and greater emphasis on client education programs. We also intend to expand our sales force by about 10% this year. We intend to continue to improve our financial performance by leveraging our SG&A and by increasing our gross margin through system enhancements, productivity initiatives and implementation of bidirectional client interfaces. And we are upping the ante on innovation with significant investments in research and development under the leadership of Dr. Albitar. We are aggressively moving to expand our molecular and IHC laboratories and will be significantly increasing the number of molecular and IHC tests offered. We're also planning to launch our second test under our agreement with Abbott Molecular within the next 2 months, and to begin developing several new products under our strategic licensing agreement with Health Discovery Corp. We're investing in innovation because we are committed to being a leader in oncology testing. We are at an exciting time for innovation in laboratory testing. With recent advances in genomics, proteomics and digital pathology, frequently large amounts of data are generated and managing this data is difficult without the aid of computer-based algorithms and pattern recognition. We believe that the best system for pattern recognition and data analysis is a technology known as support vector machines or SVM, especially when combined with a technology called recursive feature elimination or RFE. Health Discovery Corporation has an extensive array of pending and issued patents surrounding SVM and RFE technology. By licensing this technology and combining the expertise that already existed in Health Discovery with our expertise in genomics, proteomics and digital imaging, we believe we are well-positioned to begin developing innovative and proprietary new products. Our goal is to develop new assays to help our physicians and clients better manage their patients and to enable them to practice evidence-based medicine tailored specifically for each of their patients. Under the agreement with Health Discovery, we intend to develop better tests for the diagnosis and prediction of clinical behavior in prostate cancer, pancreatic cancer, breast cancer and leukemia and lymphoma. Using SVM and RFE techniques to analyze data from genomics, proteomics and digital imaging, we believe we'll be able to offer a whole new line of advanced tests that will help physicians better manage the treatment options for cancer patients. I'll summarize my remarks in the following way. We continue to make progress building and developing our company and we are now beginning to see those efforts yield improved financial performance. We continue to work hard on revenue growth and are investing in a variety of growth initiatives even as we remain determined to stay profitable. We remain very pleased and proud of our company's quality and service levels and of our people. We believe that our flexible business model, expanding test menus and new product portfolio will lead to a strong growth well into the future. And as a team, we're excited about our company and its prospects and we remain intensely focused on continuing our growth momentum in coming quarters. I'll now turn it over to Steve to comment more fully on our financial results.

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics, and then we want to open it up for questions. Since Doug has already reviewed our revenue metrics, I'll start with the operating metrics. The total number of tests reported in the fourth quarter increased by 57% over Q4 last year. Average revenue per test was $572, a 6.3% or $38 decline from the $610 recorded in Q4 last year. Importantly, average revenue per test remained relatively stable with the levels reported in Q1, Q2 and Q3 other than minor changes due to variation in the mix of tests. Gross margin improved by approximately 66 basis points in Q4 '11 to 45.25%, from 44.59% in Q4 of last year. This improvement came despite the 6.3% reduction in unit prices I just mentioned, and is directly attributable to an 18% increase in lab productivity compared with quarter 4 last year. As mentioned in the press release, we are expecting a stable reimbursement environment for our mix of business in 2012. Absent any significant test mix changes, further gains in productivity should help drive our gross margin higher as the year progresses. Turning now to SG&A, sales and marketing expenses were essentially unchanged versus Q4 2010 with just $11,000 or a 0.6% increase even though we recorded incremental revenue growth of $4.1 million over this period. General and administrative expenses increased by $981,000, or 37% from Q4 last year primarily as a result of increases in payroll, recruiting, information technology and incremental bad debt expense on the revenue increases versus last year. Total SG&A expense increased by $992,000, or 22% on a year-over-year basis. SG&A expense as a percentage of revenue decreased to 42.3% from 51% in Q4 last year. Net interest expense in the quarter increased 20% from Q4 '11 as a result of increased borrowing under capital leases in our bank facility. Net income for the quarter was $152,000 or $0.00 per share compared to a net loss of $377,000 or $0.01 per share in Q4 of 2010. If you exclude the one-time $374,000 research grant from Q4 2010's net loss, our profitability increased by approximately $900,000 year-over-year, which implies that 22% of the incremental revenue fell to the bottom line in Q4. Depreciation and amortization was $601,000 in Q4 and EBITDA was $976,000. Adjusting for the $79,000 of non-cash charges related to stock-based compensation or amortization, our adjusted EBITDA for the quarter was $1.05 million which is more than $1 million increase over the level reported in Q4 '10. We finished Q4 with 238 full-time equivalent employees and contract doctors as compared to 219 at September 30 and 185 at December 31. Our accounts receivable balanced net of allowance for doubtful accounts was $7.9 million at December 31, up approximately $500,000 from the $7.4 million balance at September 30. Our AR balance expressed in terms of days sales outstanding was 56 days as of December 31, down from the 60 days we reported on September 30. Our billing and collections team continues to do a great job. Although revenue increased by $1.6 million sequentially from Q3, our accounts receivable only increased by $500,000 over this time. You don't see that every day. In terms of our overall liquidity, as of 12/31, we had $3.1 million in cash and restricted cash on hand and $1.1 million available to us under our credit facility as compared to $3.1 million and $528,000 of availability on September 30. Our cash flow from operations in Q4 was $1.2 million as compared to $360,000 in Q4 '10. On a full year basis, we had positive cash flow from operations for the first time in our corporate history. Turning now to 2012, we believe we have a unique opportunity to drive extraordinary growth on a sustainable basis by investing in R&D over the next several quarters. In particular, we expect to invest $1 million to $1.5 million in incremental R&D expenses in 2012 in order to expand our molecular laboratory and develop new molecular tests including the tests planned under our agreement with Health Discovery Corp. However, as we have stated before, we plan to remain profitable even as we invest aggressively in growth initiatives. We intend to continue to tightly manage our costs and we expect to keep SG&A as a percentage of revenue around the same area as it is now for the next few quarters. We have stated on several occasions that we believe, absent any further deterioration in unit prices, we can drive approximately 20% to 30% of each incremental dollar of revenue to the operating profit line on a year-over-year basis and most of this should drop to the bottom line while we're working off our NOL carryforwards. Be advised, however, that we have also stated on many occasions that this trend will likely be uneven with some quarters dropping more of the incremental revenue to the bottom line and other quarters less. In particular, investors are advised that the percentage of incremental revenue that drops to the bottom line may be reduced over the next few quarters given our planned R&D investments. We issued guidance this morning for revenue of $54 million to $59 million for the full year 2012. That range would imply a growth rate of 24% to 36% for the full year. We expect net income of $0.02 to $0.04 per share even as we continue to invest in R&D and other growth initiatives. For the first quarter of 2012, we expect revenue of $13.5 million to $14 million. This range implies a year-over-year growth rate of 53% to 59% in the first quarter compared with the $8.8 million of revenue we reported in last year's first quarter. Even with the added cost for R&D, we still expect to be profitable in the first quarter with net income of $0.00 to $0.01 per share. At this point, I'd like to close down our formal remarks and open it up for questions. Incidentally, if you're listening to this conference call via webcast and if one of you would like to submit a question, please feel free to e-mail us at sjones@neogenomics.com during the Q&A session and we will address your question at the end if the subject matter hasn't already been addressed by our call-in listeners. Operator, you may now open up the call for questions.

[Operator Instructions] Our first question comes from the line of Amanda Murphy with William Blair.

So I had a question on the growth side, you talked quite a bit about the various drivers that has been supporting your growth. I'm sure is there one that stands out as more meaningful such as the -- choosing you in 2012 that could be a meaningful driver relative to others? Or are they all contributing?

So we have begun to see pretty broad-based growth from most areas of the country and from a lot of our sales representatives. We have had a fairly stable sales force over the last 12 months or so. It does take a little while to get our sales people productive. We've invested very, very heavily in training our sales team. And their growth has accelerated. We're getting new clients. We're also penetrating more deeply the clients that we currently have. So that's been a key driver. We also have worked very hard to develop a partnership model and we have, as you know, a very flexible business model here at NeoGenomics and we can do all the variety of testing, both the TC or the PC or on a global basis. And that's proven to be very nice for our partners. We have developed a variety of ways to help our client partners to grow and that's been a key source of our growth recently and in the future.

Okay, 2 follow-ups to that, so in front of the same-store sales increase or however you want to describe it, the penetration of existing accounts, how exactly are you doing that? Is it new test introductions or...?

Yes, so the way it's worked and has been pretty successful for us is that often, when we get a new client, we will provide just a certain kind of testing for them. Say that it's feather genetics or a certain kind of FISH testing. And as they gain confidence in us through our superior turnaround time and service, they are more willing to give us other parts of their testing. In addition to that, we have and are, as you know, developing our immunohistochemistry laboratory, our molecular laboratory. We've introduced a whole number of new products recently. And so we're gaining share both by gaining their confidence and also becoming more of a one-stop shop for them. And that's a strategy which we believe will generate growth for us in 2012.

Okay, got it. And I guess just last one on the TC/PC split model. It looks like that's doing well. How does that -- I guess how big of the business is now not the full global billing? And how do we think about that impacting the economics going forward as that piece grows?

It's Steve. Our revenue stream is derived, about 75% from technical component revenues. Keep in mind that not all of our clients that use the TC/PC model give us only TC testing on each case. They get to pick by test whether or not they want to order on a tech-only basis or a global basis. And a number of our doctors will refer the more difficult cases to us. Or if they're on vacation, they'll refer all the cases to us. So it's hard to get an exact split but we believe it's about 75% is derived from tech-only. And in terms of reimbursement, in the interesting trends on the physician fee schedule or are that the technical component is actually under a significantly less pressure than the professional component. And so we actually saw a 5% -- 5.3% increase in TC FISH per probe in the state of Florida, which is probably the single most billed code at NeoGenomics. And so that actually offsets a number of the other small price decreases in what is leading us to believe that we can get to a stable revenue or average revenue per test environment here. And I'm delighted actually to report that in January to -- from December, that it was dead-even with where it was in December. So we're feeling pretty good about things. And that's why we feel like we can make some progress on gross margin.

Our next question comes from the line of Kevin DeGeeter with Ladenburg Thalmann.

Congratulations on both profitability but also on the first quarter on why -- where average revenue per test has moved up as well, my question here, my first question, can you just give us a sense of how to think about target levels over time for a number of tests per requisition which has moved steadily higher, particularly in light of I guess outstanding IHC, venue and also get several relationships that are maturing here as you've been working with customers more directly for a longer period of time. But maybe can you think of it sort of maybe some of the more mature relationships and the number of tests per requisition you bring in? Kind of where does that metric go?

So Kevin, there's 2 competing forces on this. The tech-only test, we only get that portion of the test that our clients don't do in-house. So a number of our pathology clients, for instance, have the capability to do flow cytometry in-house and whatnot. And so we typically get fewer tests per case from our tech-only client. On the other hand, we're rolling out more and more different types of tests, a lot of these molecular tests we're offering we've never offered before. We actually think that it's not going to change a lot over the next few years. It will probably increase a little bit over the next 2 years but I don't think you're ever going to see it get up to the 4 or 5 test per case level that some of the global-only competitors get in the heme part of the market.

Kevin, I'll just build on that by saying one thing. One of the things that's very important to us is to offer tests and testing algorithms that are clinically relevant. And we are -- we feel an obligation as a healthcare provider to do the right thing and to help generate good results that lead to a -- an accurate and definitive diagnosis. But if we don't have to do the test, we won't.

Sure, of course. I appreciate that. On a separate issue, can you talk a little bit more about, for 2012 and beyond, where you hope to source the increased number of lab techs you'll need to support this continued high level of test volume growth? Should we think about many of them coming from Tampa? From out in Irvine? I mean, where are you finding the richest source of talent or perhaps the, I know the facility but that just seems to be the biggest operational challenge here moving forward.

Well, yes, Kevin. It has been a challenge to hire people fast enough to keep up with our volume growth. We think we've taken a couple of good steps in the right direction though. As you know, we opened a Tampa laboratory this past year, about maybe 3 months ago. It's staffed with very, very capable and experienced technologists. And the Tampa market is a rich market. It's a large market, a very big population, a lot of good hospital systems up there, and we are actually expanding our footprint in Tampa to allow us to recruit more people. The other thing is we still are recruiting people to our Fort Myers facility but we're also expanding our Irvine facility. And in the next several months, we will have moved our Irvine lab, creating a real showcase laboratory out there as another rich area to recruit people. And when we talk about having high levels of employee satisfaction and working on that, that's very important for retaining people and attracting other good people. So we think we're in relatively good shape on that front.

Okay. And then just maybe the last one then I'll get back in the queue, the stock price approaching $2 here, I guess, the discussion as to the strategies to potentially realize on that. Has that occurred another national exchange? It seemed a little more timely. Can you just give us your current thoughts on, you know, listing and practically getting off to Baltimore?

It's a great question. We've been actually spending a lot of time on that. We mentioned last year on one of our calls that, that was a goal for us and that we met every single one of the listing requirements for both NASDAQ and AMEX, except the minimum bid price. Recall that on AMEX, you need a minimum bid price of $2 for the market value of listed securities standards and $3 for the other standards. We're delighted to report this morning that NASDAQ put in an application with the SEC a few months ago to actually lower their minimum bid price requirements. The comment period for that at the SEC ended last Friday. They got one positive comment and no negative comments. NASDAQ's opened NASDAQ yesterday and they expect that by March 5, the SEC will issue a ruling on that. And thus far, they don't feel like there's much in the way of getting in the way of that ruling. So if indeed the NASDAQ does get permission to move forward with a $2 minimum bid price for the market value of listed securities, then the only thing holding us back will be a 90-day period where we have to trade over $2 per share. And we're hopeful with our surging momentum here that we'll be able to accomplish that in a fairly short order. It's difficult to predict timing on these sort of things, but clearly, this is something that we are focused on and it would be a very high priority and a high goal for us to get this done as soon as we could.

Our next question comes from the line of Scott Hurston [ph], a private investor.

You'd mentioned the average revenue per test declining in the fourth quarter. You mentioned it rather prominently in the press release. And then you go on to say you expect a stable reimbursement environment this year. My first question is what gives you the confidence to say that, given all that's going on in healthcare reimbursement these days and the recent history?

Sure. Keep in mind that the decreases in unit prices that we reported are on a year-over-year basis. So we suffered about a $38 decline, a 6.3% decline from Q4 '10 to Q4 '11. That was driven more than 90% by 2 discrete factors. The first is that in January of 2011, CMS rolled out new specific codes for bladder cancer FISH testing, which were at approximately 50% of the previous reimbursement level. And the second is, is that more and more of the Medicare service processing units put a maximum number of flow markers that they will reimburse at 24 whereas we had typically been doing 28 to 31 markets for our average heme cases. And so those 2 factors drove almost all of the decline in 2011. We didn't see any deterioration sequentially during the year other than just very modest fluctuations around mix changes. And so far, in 2012, the January average revenue per test was almost directly flat on top of December. It was actually up $1 per test. There's only 2 factors out there looming now that could have an impact on it. There's something that's known as the sustainable growth rate doc fix that Congress deals with every year. In 1999, Congress passed some legislation enacting some pro forma cuts in the Medicare reimbursement schedules that just happen across-the-board. They've put off implementing them for 11 straight years. And if they were to implement those cuts, it would be a 27.4% reduction in pretty much across-the-board reimbursements for Medicare. It would probably bankrupt a number of doctors in the United States and force a number of doctors to stop seeing Medicare patients. So there's a high amount of political motivation to get something done. We heard just yesterday that they were very close on a compromise for this that would extend it through year-end. And then there's a very technical nuance around some technical component grandfathering stuff that may be a factor but that usually gets extended every year as well. That one's been extended every year for 12 years as well. And that one usually is tied up with the sustainable growth rate fix. We don't have any more clarity than anybody else as to what Congress will do but I will tell you that it would appear in election year that people aren't going to play Russian roulette with the medical reimbursements for doctors and so we're optimistic that we will not have to hear those 2 factors come into play.

Good. That's good. My next question has to do with your -- you've spoken about substantial R&D investments this year. Do you expect to be self-financing this year?

We are cash flow from operations positive. In Q4 we made about $1.4 million. Traditionally, we've been able to lease finance, about 85% of our capital expenditures because it's usually equipment. We can't lease -- finance leasehold improvements or whatnot. And so we have a small piece of the CapEx that we don't have financing for that we got to pay for out of cash, and we have a small piece of lease-free payments that happen every year. We believe that on a full year basis, we will be cash flow positive on a full year basis. It will be lumpy though. On some quarters we have more CapEx than other quarters and we might have to fund more of that out of our own growth. At the present time we announced on the last quarterly call, that we were exploring, amending and/or replacing our bank facility to allow us a little bit more availability under our bank facility. So in terms of liquidity, we actually feel like we can get adequate liquidity that we need through just tweaking our bank facilities. And that's where our focus is.

Final question, what's your estimate to be the size of the domestic cancer genetics testing market in this country if you exclude the stuff that's done by the in-house, that the pharmaceutical firms do in-house? What sort of the -- what's the available pie to people like you and your competitors?

So we put on our website this morning, a revised company overview presentation that slices that question a little bit more finely. We estimate that the cancer testing market in heme -- hematological cancers, the blood-based cancers and bone marrow-based cancers is about $3 billion to $4 billion in total, of which $1.5 billion to $2.5 billion of that is the genetic portion of it. And we estimate that the solid tumor market for cancer testing is about $7 billion to $8 billion in total, of which about $1 billion to $2 billion of that is the genetic testing. Indeed, we're seeing a lot of opportunity on the solid tumor side. The World Health Organization started reclassifying heme cancers about 12 years ago as genetic anomalies and they just started following foot with the solid tumor cancers about 4.5 years ago. And so there's been a lot of innovation coming out on the solid tumor side. And when you parse our comments on where we're going to be investing this year, you'll see that a lot of those are more on the solid tumor side because we already address 90% to 100% of the potential available genetic tests on the hematological side.

Our next question comes from the line of Leonard Samuels [ph], a private investor.

Congratulations on your acquisition of a potential string of new tests that are proprietary that distinguish you. My question has to do -- can you expound a little bit on the timeline for penetration and the competitive situation of penetration of proprietary testing, importance to the company and how it's going to translate out to revenue and into introductions to new customers?

Well, there are a variety of tests that we are developing and launching. The -- so we are spending a lot of time developing and expanding our molecular menus. That is something that will happen over the next 6 months. We are also spending a lot of time developing and launching immunohistochemistry tests. That's something that will also take place over the next 6 months. We're also launching -- finishing our validation and development of the next test under our strategic agreement with Abbott. That test ought to be launched within the next couple of months. In addition to all that, we are continually adding to our testing menus for -- in FISH for example and other areas of our company. The proprietary step that we're talking about is, in addition to the Abbott-related tests, will be a test that we developed through the strategic licensing arrangement with Health Discovery. Those tests are tests that require a fair amount of research. They will require a fair amount of validation, and we're already working on them. We're very interested in some tests and technologies that could be more short-term in nature. But as a practical matter, we believe that some of these more potentially blockbuster tests would be -- and we'll update everyone on our progress there but those are longer term in nature and we don't expect this year to receive any revenue of any substantial amount as a result of that.

Right. So what -- since it's not this year, what is the timeline? And also in terms of the R&D, I expect that R&D components would be continuing then in future years? As you're making progress on something, so you'll say, "Okay, now we can extend this to pancreatic, or now we can extend this to hepatomas or now, whatever?"

Well, I would say that the timeline is that we're beginning in earnest to begin our development of those Health Discovery-related tests. We expect that we will spend between $1 million and $1.5 million of incremental research and development this year to develop those tests. We would expect that the timelines are very different. We will initially plan on focusing on a plasma-based prostate test, cancer test. We would hope that we would be able to launch something later this year or early next year. But we'll continue to keep people updated about our progress.

So this is very uncertain. It's really -- it's a vaporware test to a degree of the technique for developing tests. And to see exactly what comes out, you have to develop it to know what you've got.

It's more than vaporware. We have Dr. Albitar on the phone with us and maybe at this point we'd like to ask Dr. Albitar to expound on the Health Discovery technology and how it's being used today and where we expect to take it.

We like to over-deliver in our environment. We sure -- we believe that the prostate cancer, for example, we will have something to really fuel like we want to make sure that the test is very reliable. We want to make sure that we did all the clinical validation for the test. And I think it is very appropriate to conserve our terms for now. But there are some tests that we are working on. They are low-hanging fruit tests that we are hoping before the end of this year to have some of these tests or card on the market and they are really innovative tests. We still, I think, we should be very conservative and give us more time we will -- if you -- and [indiscernible] level of seed.

Now with these tests, is the plan to just run them at NeoGenomics and that use them to expand NeoGenomics business? Or are these tests that you will make kits and sell them out so that your competitors can also use them and pay you a fee? How's this going to change the business? Is this -- which way are you directed?

So Len, the way our license agreement works, and we filed the entire agreement in an 8-K filing in mid-January, is that we have licensed 84 different issued and pending patents in the RFE, SVM fields for the field of cancer testing. The specific definition of the field excludes breast cancer and retina testing right now, although we're optimistic that we'll be able to participate in breast cancer. And the only thing in cancer testing that we can't do is manufacture and sell IVD test kits. However, we have an agreement with Health Discovery that they will use their best efforts to insert a clause in any license agreements that's accomplished with any other IVD test kit manufacturers that we will be able to purchase such IVD test kits for a cost of 20%. And so we feel like we've gotten a lot of flexibility in the license agreement and we've gotten an opportunity to play on the IVD side at a very, very preferential price. What makes this license very interesting, it is a worldwide and it is exclusive for the -- except for breast cancer, which is a semi-exclusive. And so at the end of the day, we've got the opportunity also to sub-license this at will and to assign portions of this. And so I think our initial thought is that we will bring up LDTs in the United States, get them validated and commercially accepted. Any time there's a successful LDT in the marketplace, it makes the value of the IVD substantially more worthwhile. And then for those countries in which we're able to, we would sublicense the LDT rights into other countries and let other people develop that revenue stream and we would negotiate a royalty payment at that point in time which we would then have to share with Health Discovery Corp. In addition to all the testing that we're going to be looking at, the technology is so powerful that we believe there are very good applications in cytogenetics and flow cytometry analysis. In fact, there are early-stage prototypes at least for the cytogenetics automated analysis system that we're working on perfecting and commercializing. And if we can get that to the place where it works and works well and is validated, we believe we can sublicense cytogenetics automation software system to the equipment manufacturers and receive significant royalties from that. Keep in mind that cytogenetics is the most manual of all the tests we offer and it has a lower gross margin as a result of that. And so the implications for that, if we're successful in doing that, could be quite significant in terms of additional cost savings.

Our next question is a follow-up question from Kevin DeGeeter with Ladenburg Thalmann.

But really just housekeeping questions here, mostly modeling. Can you comment on the number of sales reps at year-end? Just so we have a context when I think about the 10% increase you're guiding for in 2012?

Yes, we had 21 sales representatives at the end of 2011.

Okay. Great. And current share count after the Health Discovery acquisition for the fully diluted currently?

So fully diluted right now is about $52.3 million. Although our Board is finalizing some option grants this will [Audio Gap] that will increase slightly. We'll give details of that in our 10-K. That's obviously without taking into consideration exercise prices or anything else. That's fully, fully diluted. The diluted shares you would use for financial reporting purposes is calculated using something called the treasury stock measure, and that's about 46.5 million shares outstanding right now.

Perfect. And a bit of a nice problem to have, once again, but can you talk a little bit about tax assets? And how we should view the ability to monetize those in a timely manner? And your restrictions on them, et cetera? And just quantitatively the size of tax assets?

The last time I looked at this we had about an $8.5 million tax NOL which is the kind that can really save you cash. With the book NOLs closer to $13 million, we are going to be starting using those this year. They are limited as to how much we can use in any given year. The way this works, if there's a change in control, there's a very complex formula about how soon you can use those. And it works out to be about 21, 22 years, as the period for any NOLs that occurred before the change of control. We're fortunate that the last change of control happened in 2003. And so we have only a small portion of our NOL is subject to that limitation. But I believe that we will -- I hope, I should say, that we will use our NOL well over the next 2 years and we can't wait to have enough momentum to have the high-class problem being an actual taxpayer.

Sorry and just lastly to clarify that, so your expectation is for 2012 and '13 that you'll be paying 0% cash? Then presumably, for accounting purposes, by 2014 you have to go in terms of accrual anyways?

We're always amazed that there's various ways the taxation authorities are able to get some money out of us. So I had to take this to, say, 0. for instance, California doesn't allow NOLs. They have a -- they suspended the use of NOL applications for 3 years to address their budget mix. I'm sure we'll pay a little bit of tax, but not much.

[Operator Instructions] Our next question comes from the line of Jim Gentrup with the Subway Investment Research.

I just have a quick question about sales growth. Is it a function of taking market share? And does that differ across your different -- the types of tests as well? Can you elaborate more on just, or is it growth because of the green deal type of tests that you're just developing new? Can you talk about that a little bit more?

Yes. All of the growth that we've experienced -- virtually all of the growth that we experienced in 2011 has come from market share gains.

Okay. And then in 2012, your kind of guidance, would that also assume more market share growth that you're taking business away from the other competitors?

Yes, predominantly. I mean, there is a natural growth in the market. And we've talked about that. The baby boomer impact and all of that sort of thing. So there's clearly natural growth. However, the lion's share of our growth will continue to come through market share gains. We'll get some growth through new test introductions, expanding our menus and becoming more of a one-stop shop for our clients. But ultimately, that is market share gains as well.

And the cheap reason for that is better execution or turnaround times? Or can you tell us some more about that?

Well, we've tested this a lot with our clients and we've just developed a strategy and are talking with our clients about what it is that we do well and what it is that we can do better. And we believe that our turnaround times are the best in the industry. And we believe that our service levels are very, very high. And we believe that the flexibility of our model where we actually sincerely go to try to help our clients grow their business is very important. And so those kinds of things are driving our growth right now. We -- and we've got a number of things in store that we believe can augment our strengths and maintain that kind of growth momentum as we look forward.

And when you start developing more of these proprietary tests, whether it be 6 months or next year, would they also be categorized as under the tech-only or would you'd be more in -- they would be rather global on the global side because you're -- because they're proprietary? How do you look at that as -- or you'd rather partner with your current partners on these 2?

Well, there's some of each. So one of the tests that we talked about that we are planning on launching this year could be a tech-only or global test. But a number of the molecular tests would tend to be more global tests. They would be billed under the clinical lab fee schedule. And so there's a bit of both.

Okay. And lastly, you said about gross margin improving throughout the year. I'm assuming it's because -- you're assuming a stable pricing environment and you're going to get more -- even more productivity gains. Is that the correct assumption?

Yes, that's correct. And the productivity gains will come from a number of different sources. One is we can leverage our scale and our infrastructure. But we also have, we believe some productivity enhancements that will come from enhancing our laboratory information system and connecting better with our clients electronically and there are a number of ways -- and basic process improvements. We talk about total quality efforts. We're talking about improving our quality and reducing defects and rates at the same time. And so, we're working on all of these things. And it's hard work, but we think that we can incrementally drive improvement in our gross profit.

And if you care to give us a range, 2 to 3 points or...?

We have not given out a range because we want to see how it goes. Or we do believe it will receive modest improvements this year. But we're not at a point yet where we're ready to quantify that.

I have one e-mail question that's come in, a couple questions here. Are you guys all set with d codes and your pair groups now? Yes, I'm delighted to report we've actually just received our d codes and we're ready for this as this relates to an initiative out in California to do some trials around changes to the way molecular testing is reimbursed. I think they recall there was one more pair we were looking to getting in that work with. They were referencing the Cigna. We do not have a nationwide contract with Cigna yet, although we've had extensive discussions with them. Cigna has a different kind of contracting mechanism with the international lab pairs. It's a small percentage of our overall pair. It makes it the only significant insurance company that we don't have on contract. We might have at most 2% of our revenue reimbursements exposed to that. Given the buzz around companion diagnostics, you guys see any opportunities with pharma and biotech? If you could give us your thoughts on how the market is involved in this regard would be helpful? Yes, we agree with you completely. The world is changing very rapidly in this. For those of you who follow such things, Pfizer just took their out drug, there's a par A drug through the FDA with a companion diagnostic outtesting and we expect that the FDA will create incentives to bring drugs and tests through the market together. We have relationships with several large pharma companies and by contract and by design, we just don't talk about that. It's something that is interesting to us, but it's not anything we're going to talk about on a call where our competitors can listen. Sales force expansion, can you give us a little color on how you're thinking about planning to grow the sales force? Well, Doug mentioned in his remarks that we intend to hire at least 3 more sales reps this year. When you consider that we did over $4.1 million of incremental revenue with just an $11,000 sales and marketing expense, it speaks to how efficient we were this year versus the previous year. We probably did over-hire a couple of years ago. We pretty much got all of that ironed out now. I would expect us to begin to hire now that we've got the processes and the systems in place. But we're not going to go crazy. This is not a "if we build it they will come" strategy. This is "add when the marketplace warrants adding". That is all the e-mail questions I have. So at this point, I'm going to turn it back over to Doug to wrap this up.

Okay. Well, thank you very much for all your questions today. And as we end the call, I'd like to recognize all 238 of the NeoGenomics team members around the U.S. for their dedication and commitment to building a world-class cancer genetics testing program. And on behalf of the entire NeoGenomics team, I want to think you for your time joining us this morning for our quarter 4 earnings call and let you know that our quarter 1 2012 earnings call will be on, or around, Wednesday, April 25. For those of you who are listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our company. Goodbye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.